Fitch Affirms Morgan Stanley Ratings at 'A/F1'; Outlook Stable

Reuters Staff

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(The following statement was released by the rating agency) NEW YORK, March 26 (Fitch) Fitch Ratings has affirmed Morgan Stanley's ratings including its Issuer Default Ratings (IDRs) at 'A/F1', support rating at '1', support rating floor (SRF) at 'A' and viability rating (VR) at 'a-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release. The rating actions on Morgan Stanley have been taken in conjunction with a periodic review of the Global Trading and Universal Banks, which comprise 12 large and globally active banking groups. Fitch's outlook for the sector is stable on balance. Earnings pressure in securities businesses and continued conduct and regulatory risks present in the GTUBs are offset by stronger balance sheets as capitalisation and liquidity remain sound. Fitch forecasts stronger GDP growth in most economies, which should contribute to a more balanced operating environment, but the operating environment is likely to remain challenging in 2014. Today's rating actions assume that Morgan Stanley will perform adequately under the CCAR stress test, though Fitch has no visibility into any potential qualitative rejections for Morgan Stanley, or any of the other 29 banks subject to regulatory stress testing. Although a qualitative rejection of a capital plan request under CCAR would be viewed negatively, it is not expected to have any rating implications for Morgan Stanley. KEY RATING DRIVERS - IDRs, SENIOR DEBT, SR and SRF Morgan Stanley's Long- and Short-term IDRs, Support Rating (SR), Support Rating Floor (SRF) and senior debt ratings reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government ('AAA'/Outlook Stable) if required, and the Long-term IDR is at its SRF. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to Morgan Stanley, our view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, growing deposit base and its position as a key provider of financial services to the U.S. economy. In Fitch's view, there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvency assessments. Despite the likely removal of support in the U.S., the Stable Outlook on Morgan Stanley's Long-term IDR reflects Fitch's view, that Morgan Stanley's fundamental credit profile is improving and that its viability rating is likely to improve over the next one to two years. Therefore the upward momentum in the VR offsets the likely removal of sovereign support in the U.S. which would result in Morgan Stanley's IDR and VR being equalized. RATING SENSITIVITIES - IDRS, SENIOR DEBT, SR AND SRF The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). Hurdles that remain include the resolution of how cross-border derivative acceleration/termination provisions are handled and that there is sufficient contingent capital at the holding company to recapitalize without requiring government assistance. Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Given the direction of the U.S. government's willingness to support banks in the future, Fitch expects that Morgan Stanley's SR will be downgraded to '5' and the SRF will be downgraded to 'No Floor' within one to two years, likely to be some point in the late 2014 or in 1H15. It is unlikely that a revision of Morgan Stanley's SRF to 'No Floor' will lead to a downgrade of its Long-term IDR despite the fact that Morgan Stanley's IDR is at its SRF because Fitch expects that there will be upward momentum in Morgan Stanley's Viability Rating over the rating over the next one to two years. Therefore, absent a material adverse change in market conditions or individual company profile, Morgan Stanley's IDRs are unlikely to change when the support rating floor is revised to 'No Floor'. KEY RATING DRIVERS - VR Morgan Stanley's VR of 'a-' continues to be supported by the company's solid liquidity position, improved risk management, and higher-than-average capital position. The VR also reflects Morgan Stanley's continued execution of its wealth management strategy based on its 100% ownership of Morgan Stanley Smith Barney including measured deployment of bank deposits into appropriate investments in lending products, improving margins and navigation of evolving regulatory challenges. The upward momentum in the VR reflects Fitch's expectation that Morgan Stanley will continue to effectively execute on its Wealth Management strategy, further reduce risk weighted assets, and improve ROEs to a level at or above its cost of capital. The VR remains constrained by wholesale funding risks, challenging industry prospects given the impact of new regulations and continued global economic uncertainty. Overall, Morgan Stanley's performance (excluding legal expenses and other one-time items) has improved as it continues to benefit from improved margins in the wealth management platform and investment banking revenues, which partially offset weaker fixed income and commodities net revenues. Pre-tax operating margin for Wealth Management improved to 19% as of Dec. 31, 2013 (excluding a one-time impairment charge), which is above the company's 2013 margin target of 18%. Fitch believes that if the company can successfully execute on its strategy to deploy deposits into loans and securities with higher returns without assuming outsized risks, then it will be able to achieve a targeted pre-tax margin of 22% - 25% by 4Q'15 . Morgan Stanley's earnings are becoming more balanced as the company continues to expand its wealth management platform. This reduces the company's comparatively higher reliance on capital market operations in relationship to many other GTUBs, reflecting its focus on the institutional securities business. The greater stability derived from its wealth management platform and the measured growth of the bank contributes to the positive momentum in Morgan Stanley's VR. That said, Morgan Stanley's future earnings will continue to be less diverse than other larger universal banks. Morgan Stanley's capital position is relatively strong and continues to improve. Tier 1 common ratio under Basel III is estimated to be approximately 10.5% at 4Q'13 (in line with the average of the U.S. GTUBs). Morgan Stanley reported that as of Dec. 31, 2013, the supplementary leverage ratio (SLR) for the bank exceeded the 6% threshold, while the holding company SLR was 4.2%, below the 5% threshold. Fitch continues to believe that Morgan Stanley will be able to meet the SLR thresholds prior to the required timeframe. Liquidity continues to be maintained at conservative levels, which is viewed as appropriate given Morgan Stanley's wholesale funding profile. Unencumbered highly liquid securities and cash was a solid $202 billion or 24% of total assets as of Dec. 31, 2013. Morgan Stanley estimated that is Basel III liquidity coverage ratio remains well in excess of 100%. Fitch believes that Morgan Stanley is more vulnerable to funding and rollover risks than a number of GTUB peers as it is primarily wholesale funded. To reduce wholesale funding risk, Morgan Stanley has reduced its reliance on unsecured short-term to minimal levels with no reliance on commercial paper or 2a-7 funds as of Dec. 31, 2013. Morgan Stanley has a strong governance policy on secured funding, including maturity targets and limits set for each tier of collateral. Although deposits are increasing at the subsidiary bank, they remain a relatively moderate portion of the overall funding mix. In February 2014, Morgan Stanley settled it pre-crisis residential mortgage-backed securities lawsuit for $1.25 billion with the Federal Home Housing Finance Agency. The settlement had no ratings impact on Morgan Stanley's ratings. Morgan Stanley's pre-tax operating income was modestly affected by this settlement. RATING SENSITIVITIES - IDRs, VR and SENIOR DEBT Morgan Stanley's viability rating has a higher probability of being upgraded to 'a' from 'a-' upon further execution of its Wealth Management strategy, including measured deployment of bank deposits into appropriate investments in lending products, and improved returns on equity in excess of cost of capital. Successful navigation of evolving regulatory challenges including the Volcker Rule and Basel may also contribute to upward rating momentum as will maintenance of strong capital and liquidity levels. Downward pressure on the VR could be driven by Morgan Stanley's inability to execute on its Wealth Management strategy, resulting in sustained operating weakness or returns on equity substantially below its cost of capital. Additional potential negative drivers could include an inability to successfully navigate evolving regulatory requirements such as the Volcker Rule or Basel, material losses, a significant increase in leverage and risk weighted assets, reduced capital ratios, deterioration in liquidity levels or outsized fines, settlements or other charges. RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT & OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Morgan Stanley and by various issuing vehicles are all notched down from Morgan Stanley's VR in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. Subordinated debt and other hybrid capital ratings are primarily sensitive to any change in the VRs of Morgan Stanley. RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS Morgan Stanley's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. However, Morgan Stanley's uninsured deposits outside of the U.S. do not benefit from rating uplift because they do not typically benefit from the U.S. depositor preference unless the deposit is expressly payable at an office of the bank in the United States. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get the rating uplift. The ratings of long and short-term deposits issued by Morgan Stanley and its subsidiaries are primarily sensitive to any change in Morgan Stanley's IDR. RATING DRIVERS & SENSITIVITIES - HOLDING COMPANY Morgan Stanley's IDRs are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries, as well as the use of the holding company to fund subsidiary operations. RATING DRIVERS AND SENSITIVITIES - SUBSIDIARY & AFFILIATED COMPANIES The IDRs of Morgan Stanley's major rated operating subsidiaries are equalized with Morgan Stanley's IDR reflecting Fitch's view that these entities are core to Morgan Stanley's business strategy and financial profile. Morgan Stanley is a leading global bank with three business segments: institutional securities, global wealth management, and asset management. In September 2008, Morgan Stanley converted to a bank holding company (BHC) regulated by the Federal Reserve. Morgan Stanley is currently the sixth largest bank by assets in the U.S. and designated as a G-SIFI by the Financial Stability Board. The following ratings were affirmed: Morgan Stanley --Long-term IDR at 'A' with a Stable Outlook; --Long-term senior debt at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'; --Commercial paper at 'F1'; --Market linked securities at 'Aemr'; --VR at 'a-'; --Subordinated debt at 'BBB+'; --Preferred stock 'BB'; --Support at '1'; --Support floor at 'A'. Morgan Stanley Bank N.A. --Long-term IDR at 'A' with a Stable Outlook; --Long-term Deposits at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1'; --Support at '1'. Morgan Stanley Australia Finance Ltd --Long-term IDR at 'A' with a Stable Outlook; --Long-term senior debt at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'. Morgan Stanley Canada Ltd --Short-term IDR at 'F1'; --Short-term debt at 'F1'; --Commercial paper at 'F1'. Morgan Stanley International Finance SA --Short-term debt at 'F1'. Bank Morgan Stanley AG --Long-term IDR at 'A' with a Stable Outlook; --Short-term IDR at 'F1'; --Support at '1'. Morgan Stanley Secured Financing --Long-term senior debt at 'A'; --Short-term debt at 'F1'. Morgan Stanley Capital Trust III-VIII --Preferred stock at 'BB+'. Fitch will hold a teleconference to discuss sovereign support for banks and give an update on rating paths on Friday, March 28 at 15:00 GMT. Callers must register in advance using the link below and are requested to dial in early: here DA40C4B1FED21 Contact: Primary Analyst Tara Kriss Senior Director +1-212-908-0369 Fitch Ratings, Inc., One State Street Plaza, New York, NY 10001 Secondary Analyst Ilya Ivashkov, CFA Senior Director +1-212-908-0769 Committee Chairperson Gordon Scott Managing Director + 44 20 3530 1075 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Jan. 31, 2014); --'Securities Firms Criteria' (Jan. 31, 2014) ; --'Assessing and Rating Bank Subordinated and Hybrid Securities (Jan. 31, 2014); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'The Evolving Dynamics of Support for Banks' (Sept. 11, 2013); --'Bank Support: Likely Rating Paths' (Sept. 11, 2013); --'Sovereign Support for Banks: Update On Position Outlined In 3Q13' (Dec. 2013); --'2014 Outlook: U.S. Securities Firms' (Nov. 21, 2013); --'2014 Outlook: U.S. Banks' (Nov. 21, 2013); --'Global Trading and Universal Banks - Periodic Review' (Dec. 12, 2013); --'Fitch Fundamentals Index - U.S.; Index Trend Analysis 4Q13' (Jan. 15, 2014); --'U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain)' (Jan. 27, 2014); --'U.S. Banking Capital Market Update: 4Q13 (Weak FICC Results Limit Overall Revenue Growth)' (Jan. 28, 2014). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Securities Firms Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here The Evolving Dynamics of Support for Banks here Bank Support: Likely Rating Paths here Sovereign Support For Banks: Update on Position Outlined in 3Q13 here 2014 Outlook: U.S. Securities Firms (Capital and Liquidity Counterbalance Challenging Market Conditions) here 2014 Outlook: U.S. Banks here Global Trading and Universal Banks - Periodic Review here Fitch Fundamentals Index - U.S.; Index Trend Analysis 3Q13 here U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) here U.S. Banking Capital Market Update: 4Q13 (Weak FICC Results Limit Overall Revenue Growth) here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.